The Tech Bull Run — Are we going to party like it’s 1999?

A word of caution.

So far this year the Nasdaq index is up circa 38%. It seems that investors have decided that rather than leaving money in the bank (being eroded by inflation and negative rates) it’s better to throw it into tech. The theory is that AI will transform the world to the benefit of a few mega caps (Nvidia, Google, Apple, Alphabet, Microsoft) In the dot com bubble of 1999 the index rose 101% before it fell back to earth in 2000 & 2001. Will history repeat itself?

There is no doubt that the rise of the NDX in 1999 was a bubble, as many of these companies had minimal revenue and very little chance of becoming profitable. Remember Pets.com?! Certainly tech is at a different point today, with companies returning billions of dollars in profitability. But as of Friday, Nvidia’s PE was at 222 with a market cap of over $1 trillion. That means Nvidia needs to make many more billions over the next few years to justify such a heady valuation.

The fear and greed index is swinging in favor of the bulls. The big losses of hedge fund managers who have been short are hitting the headlines. But before we all jump in and join the party (like it’s 1999) consider this — whilst the Fed has put rates on pause, not much has been said about Quantitative Tightening (QT). Janet Yellen compared QT to “watching paint dry”, describing the process as something “that happens quietly in the background.” So we should expect that central banks will continue to draw liquidity out of the financial system on both sides of the Atlantic.

The good news is that the quickly forgotten issue over the US debt ceiling got resolved (for now). But what does that mean for financial markets? The US Treasury has launched a wave of bond issuance since the agreement with buyers flocking to buy short dated T-Bills. US Banks are struggling to hold on to customer deposits.

As the Fed continues with QT and the US Govt goes a spending spree, where is fresh liquidity going to come from? A market driven spike in rates, followed by a swift pull back in equities, appears the most likely scenario.